ABC Analysis It is an inventory categorization method which consists of dividing items into three categories, A, B and C – “A” being the most valuable items, “C” being the least valuable. EOQ can be explained with the help of following diagram: ABC analysis is a technique of controlling different items of inventory. Holding costs may include some elements, the costs of which are stepped up with the increase in quantity; for example, if inventory reaches a level where another member of staff is required to control it, there is a stepped increase in costs. 3 0 obj One of the most important elements in gaining control of inventory is to draft a reports that records information about inventory. Economic order quantity can be determined with the help of the following formula: In order to decide when to order an inventory, one has to decide: (i) Order Lead Time – Average time that elapses between placing an order and receiving the goods. (a) The usage of a particular item for a given period (usually a year) is known with certainty and the usage rate of the product is even throughout the period. The main techniques are . Five Techniques of Inventory Control. (c) A loss in the form of increased total holding costs of inventory. Fewer the number of orders lesser the ordering cost. In other words, when the amount of raw material reduces to a certain level, then new order is forwarded to get materials again. Rather it should exercise greater control over more costly items and lesser control over less costly items. Inventory Reports 10. Techniques of Inventory Management Inventory management consists of effective control and administration of inventories with the aim of holding the supply of required quantity and quality of inventories at the required time. 5. The VED analysis segregates inventories into three categories in the decreasing order of their criticality. Every time you place a purchase order, you have to pay the item manufacturer for your goods. Slow moving stocks must be evaluated very cautiously before any replenishment orders are placed. (ii) The firm consumes the input at a uniform rate. Good inventory management is essential to the successful operation for most organizations because the amount of money invested in inventory represents, and the impact that inventories have on daily operations of an organization. If the inventory is too little, the organization would face regular stock-outs involving high ordering cost. However, if demand fluctuates, you may run out of inventory sooner than you anticipate. It can be calculated using … For instance, the numerator may be materials consumed, cost of goods sold or net sales. The B items are similar to the A items except that there is less frequency i.e., about 20% of the inventory item contributes about 20% of value of consumption. Accordingly, inventory items are classified into three categories as under: (i) Category A – These are the costliest items of inventory, (ii) Category B – These are less costly items. ii. What Would Holding and Ordering Costs Look Like for the Years? The pattern of three types may be as follows: Utmost attention is paid to category A and its level is strictly controlled. This is also similar in principle, the only difference is that it finds out materials and components that are valuable, which are essential and which are desirable. Even if all the assumptions don’t hold exactly, the EOQ gives us a good indication of whether or not current order quantities are reasonable. Copyright 10. These items are neither very expensive nor very cheap and constitute only 15% of the total value of inventory. 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